NEW YORK — To understand how banks are faring during a period of widespread economic uncertainty, at least one Federal Reserve official will be watching credit markets.
Federal Reserve Bank of Chicago President Austan Goolsbee said policymakers have seen conflicting signals about credit conditions as of late, but he is hopeful to get clarity on that matter soon.
Addressing a group of reporters at an event hosted by the Economic Club of New York on Thursday, Goolsbee said the information the Fed has about direct lending practices and the market's treatment of traded debt instruments paint very different pictures of conditions within the banking system.
"Direct lending credit has remained moderately restrictive and kind of tight, and most of the credit measures that go through the market, like junk bond spreads and others, have been very narrow," he said. "So, we've had a schizophrenic view of what our credit conditions are like. Are they restrictive, or are they loose?"
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Goolsbee attributed the disparity to recent fluctuations in stock markets, which have swung wildly amid the Trump administration's tariff proclamations. In the wake of the
"Let's wait a week or two," he said. "People may change the posture of where they think overall credit conditions are if equities are underperforming, you see banks tightening lending standards and some of those bond spreads widen. Feels like that would be more of an interpretation that would go right to the heart of how [the tariff response] would affect banking."
Goolsbee — who served as the chair of the White House Council of Economic Advisors under President Obama — said he prefers monitoring credit conditions to other indications of banking health. He noted that some policymakers and analysts track broader financial conditions, but said that doing so comes with a "reflection problem" for the Fed. If financial markets believe the Fed's policies are working, he said, financial conditions could appear more sound than underlying fundamentals would otherwise dictate.
"You say, 'Oh look, financial conditions are easing. We should tighten.' And that would be mostly you just seeing yourself in a mirror," Goolsbee said. "In my calculations, I often put more weight on the straight credit-type measures plus real economy measures. Everybody in banking … understands that recessions and slowdowns are not good for loan performance. So that's where my head goes."
During the scrum, Goolsbee said even with the Wednesday "pause" announcement from President Donald Trump, the tariffs being implemented are larger than the worst case scenario he considered ahead of their rollout last week.
He said his base expectation was an additional 2% — bringing the average to between 4% and 5% — and levy rate of 25% to 30% against China. Instead, Trump's pause consists of a 10% rate across the board and a 145% tariff on Chinese imports.
"That's a big scenario. That's not negligible to start," he said, adding that "there are still several question marks for anybody who's thinking through the impact which contribute to the uncertainties here, like are there going to be exemptions? How long are we talking about? What's going to happen in 90 days? All of those are questions that there aren't really answers to … we just need to discover it."
Should the current tariffs remain in place, he said they will certainly contribute to inflation in the near term. But for now, Goolsbee, a voting member of the Federal Open Market Committee, said he is waiting for additional data on how the economy will respond to this sweeping change.
Goolsbee said the threat of "stagflation" — a period in which the economy shrinks but prices continue to rise — is real. He added that there is no proven playbook for
"That's the iron triangle of uncertainty that we need to sort out now," he told attendees during a luncheon event hosted by the Economic Club.
One silver lining, he said, is that the unemployment rate remains near historic lows at 4.2% and inflation is close to the Fed's 2% target, with the latest Consumer Price Index showing a 2.4% year-over-year increase in March.
But such data is inherently backward-looking, Goolsbee said, and of little use to policymaking in a fast evolving environment. Because of this, he said he is leaning more heavily than normal on "soft data" — namely surveys of inflation expectations among consumers and businesses.
While such surveys are often skewed, Goolsbee said they are instrumental in determining whether long-term expectations for inflation are becoming "unanchored," indicating a lack of confidence in the Fed's ability to hit its 2% target. Should longer-run expectations move up materially, he said that could force the Fed to lower rates regardless of what other economic indicators show.
"If you start to see that break, the Fed has to step in, almost regardless of the business cycle," he said.
